Tagged: Interest Rates

An expert says in comparison to savings account, liquid funds will give better returns as the interest rate on them is around 6.5% which is 1-2% higher than savings deposit
Vivina Vishwanathan | Mon, Jul 31 2017. 07 53 PM IST | LiveMint.com

On Monday, State Bank of India (SBI), the country’s largest lender, cut the interest rate on savings account deposits from 4% to 3.5% per annum. The bank, in a BSE notification, said the 3.5% per annum interest rate is for deposits up to Rs1 crore in a savings account. For deposits above Rs1 crore, account holders will continue to earn 4% interest. Here is a look at what it means and what you should do:

The rate cut

Till 2010-11, the interest rate on savings account deposits stood at 3.5%. In October 2011, the Reserve Bank of India (RBI) deregulated interest rate on savings accounts. This allowed banks to set their own interest rates. From 2011-12 onwards, a majority of the large commercial banks offered an interest rate of 4%. However, then new banks such as Yes Bank Ltd and Kotak Mahindra Bank Ltd started offering higher interest rates of 6-7%. Even today these banks offer a higher interest rate.

But why did SBI cut its interest rate?

“The rationale is that the real interest rate is very high right now. In April 2011, interest rate on savings accounts was 3.5% and then there was a negative carry of nearly 5%. Today, if you look at inflation and all other benchmark rates, there is a positive carry of nearly 2.46% on savings bank interest. Real interest being so high, there was no choice for the bank but to bring down the savings account interest rate. The choice was either to raise MCLR (marginal cost of funds-based lending rate) or reduce the savings bank rate. We didn’t consider it appropriate to raise MCLR,” said Rajnish Kumar, managing director, SBI.

What should you do?

Financial planners don’t recommend leaving money idle in a savings bank account. “Typically at 4% interest rate, it was never recommended to leave money in a savings account. At 3.5% it further doesn’t make any sense at all,” said Surya Bhatia, a New Delhi-based financial planner.

Then what should you do?

“Ideally, you should put your money in instruments that give you better returns. You can make use of sweep-in fixed deposit product or liquid funds,” said Bhatia. If you are under the higher tax brackets, fixed deposit may not work for you. Liquid fund will be a better option.

Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India) Pvt. Ltd, said, “For the first time, the realization of a low interest rate is likely to hit the consumers. SBI’s move will also start the entire process of shifting investment from guaranteed products to other financial assets. This is going to be a significant turning point for incremental money to move towards financial instruments. However, I am not concluding that all money will come to mutual funds but we will benefit,” said Mohanty.

So what is the interest rate on liquid funds?

“In comparison to savings account, a liquid fund will give you better returns. Currently the interest rate on liquid funds is around 6.5%. Last year it was around 8-9%. In any case you will benefit since you are likely to get 1-2% higher returns higher than savings deposit,” said Mohanty.

Hence, instead of leaving your money idle in a bank account, put it to work through other financial products.

MUMBAI: In a move that will encourage banks to lend more for housing in large cities and make high value home loans cheaper, the Reserve Bank of India reduced the risk weightage on home loans above Rs 75 lakh to 50% from 75% earlier.

“Considering the importance of the housing sector and given its forward and backward linkages to the economy, it has been decided as a countercyclical measure, to reduce the risk weight on certain categories. It has also been decided to reduce the standard asset provisioning on such loans,” RBI said in its monetary policy.

In its monetary policy review the RBI retained the repo rate at 6.25% and the reverse repo rate at 6%. The marginal standing facility (MSF) – an emergency funding facility continue to remain at 6.5% as also the cash reserve ratio of 4%.

In another move that will ease liquidity in the banking system by close to Rs 50,000 crore, Reserve Bank of India has reduced the statutory liquidity ratio (SLR) – the prescription for minimum holding of government securities. As against investing 20.5% of their deposits in gilts, banks will now have to invest only 20% with effect from June 24, 2017. RBI said that the reduction was aimed at allowing banks to comply with the international norms on liquidity coverage that come into effect from January 2019.

It was widely expected that the central bank would keep rates on hold. However, economists believed that RBI would ease its stance from `neutral’ to `accommodative’ to send a message that easy money conditions would prevail. The central bank however continued to maintain a neutral stance on the ground that easing of prices might be temporary. It also pointed out that fuel prices have been hiked since the inflation numbers were published and prices might rise further.

The joy of owning your own space, a home you can call your own, is a dream for many. But thanks to home loans, many are able to realise this dream. But there comes a time, after one buys a home, that the satisfaction of owning your own place may be dampened by the financial burden of EMIs.

Well, what if we told you there is a way? You can let nothing take away your happiness by simply refinancing your home loan.

What does refinancing your home loan mean?

Refinancing your home loan is nothing but a home loan balance transfer. It simply means the option to switch to another lender who can give a lower home loan interest rate. With home loan balance transfer, you can transfer home loan from one housing finance company to another. Home loan transfer occurs when the entire unpaid principal loan amount is transferred to another home loan finance company for a lower home loan interest rate or to avail a top-up on the original loan amount. The financial institution that had originally extended the loan to you gets the unpaid amount and you have to, in turn, now pay your EMIs at the new rate to the financial institution that has taken up the loan.

How do you go about it?

Knowing the value of your property is essential. The next step is doing a cost-benefit analysis i.e comparing the risks versus the rewards. Make sure that the profits you earn out of the lower interest rates are more than the home loan transfer charges you pay.

What are the advantages?

Lower Interest rates:

A lower rate of interest is one of the major reasons that borrowers transfer home loan from one lender to another. For instance, an individual is paying higher interest on an existing home loan than that offered by another lender, he would naturally be tempted to go in for a new loan that brings down his total interest cost and consequently his EMI. It helps in increasing your savings due to the lower interest rates which result in lower EMIs.

Reduce your loan tenure:

The loan tenure is inversely proportional to the EMI payments you are making. Higher the loan tenure, lesser the EMIs, and vice versa. Similarly, the total interest paid is directly proportional to the tenure. The higher the tenure, the higher the total interest paid. One can opt to change the tenure in case of changing life circumstances like a promotion in your job, windfall gains in business which enables the person to afford a higher EMI payment and shorten his tenure, and get debt free earlier. Visit Home Loan Interest Rates page to know more.

Get additional loan opportunity:

Along with the lower home loan interest rate, one can also get an opportunity to get additional funds for registration purposes, home improvement or expansion purposes. One should only opt for a top-up of the loan if he is getting the benefits of lower rates.

Tax Benefits:

An individual taking a loan from specified housing finance companies is entitled to certain benefits and exemptions. Section 24 of the Income Tax Act states that Interest paid on capital borrowed for the acquisition, construction, repair, renewal or reconstruction of property is entitled to a deduction. Rs 2,00,000 is the maximum amount eligible for deduction in the case of self-occupied property and for rented out property there is no limit of amount of deduction.

Diversify your investments:

You can also use home loan balance transfer to increase the tenure in order to reduce the monthly payments. This is a viable option if a better investment is found and you want to divert a part of the payments to that investment.

The competition amongst home loan lenders is getting aggressive. Last month in May, several top lending institutions had reduced their home loan interest rates and are expected to lower them further, given the push to the housing needs in the country.

The drop in the home loan interest rate was in spite of the RBI holding on to the repo rate for the last few months.

The new option
In addition to lowering the home loan interest rates, few banks have started offering borrowers, the option to choose between 6-month reset period and 12-month reset period while taking the MCLR linked home loan.

Since April 1, 2016, when the MCLR was introduced, almost all the banks kept the reset period at 12 months. However, of late few banks have started offering the option to choose the reset period of 6 months in addition to the 12-months period. ICICI Bank has recently started giving the option to choose between 6 months and 12 months reset period. Axis Bank and Kotak Bank are the two other banks offering the 6-month reset period only.

How it matters
In a 12-month reset period home loan, if one takes a home loan in June 2017 and the RBI cuts repo rate in August 2017, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in June 2018 only i.e. after 12 months.

In a 6-month reset period home loan, if one takes a home loan in June 2017 and the RBI cuts repo rate in August 2017, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in December 2017 only i.e. after 6 months. For the borrower, the MCLR of the bank in December 2017 will be applicable.

In effect, there is a waiting period for the borrowers to see an impact on the EMI’s. Therefore, MCLR linked flexible home loans are sort of ‘fixed’ for a certain period of the loan.

How to choose
Choosing between the two might be a tricky issue and the answer to it may not be a straight forward one. It will boil down to the movement of the interest rate, both in the short-term and in the long-term. “If interest rates are falling, opt for a shorter reset period so that you can avail reduced rates sooner. In case the interest rates are rising, opt for a longer reset period so that your loan burden does not go up for a longer period,” says Navin Chandan , Chief Business Development Officer, BankBazaar.

Rather than looking at the shorter term movement, a long term trend could be of help to a prospective borrower. “In a scenario where a decrease in interest rates is foreseen, it might be better to opt for a shorter reset period,” informs Ranjit Punja, CEO & Co-Founder, Creditmantri.com.

However, here is an important point not to be overlooked. “Yes, it’s a fact that home loan rates under 6-month MCLR will be revised and get reset in every six months compared to every year in 12-month MCLR, but the catch here is the markup to the MCLR, which actually adds to the effective lending rate, says Rishi Mehra, CEO, Wishfin.com.

According to Mehra, “You need not only to glance at both the MCLRs (Bank’s 6 and 12-month MCLR) but also the markup. Add the MCLR and markup in both 6-month and 12-month MCLR, and opt the one that has a lower lending rate on offer. For example, ICICI Bank offers a home loan of up to Rs 30 lakh at 6-month MCLR of 8.15% and 1-year MCLR of 8.20%. But the effective lending rate comes out to be equal in both the cases.”

Also, the quantum of loan matters. “Another factor to look at is the quantum of the loan up to which 6-month MCLR is applicable. In the case of ICICI Bank, 6-month MCLR is available for a loan of up to Rs 30 lakh only,” informs Mehra.

Can the reset period be changed
Bringing a change in the reset period may not always be an easy task. Better, if as a borrower, one gets clarity from the lender at the initial stages of taking a loan. “The reset period is typically pre-defined but it might be modified after a discussion with the lender,” informs Punja.

Can the markup change during the tenure
Let’s says, a customer takes a home loan at a certain markup. On the reset date ( after 6 or 12 months as the case may be), there is a possibility that the bank’s markup has changed. “The lenders can make changes in the markup, which gets influenced by the cost of funds to be borne by the banks. As these costs can vary from time to time, there would be changes in the markup accordingly,” says Mehra.

EMIs get reset periodically
In the base-rate era, when RBI reduced the policy rate, both the existing and the new borrowers, expected a fall in the rates with immediate effect. It’s a different story that banks delayed any such rate cut but were prompt in raising them whenever RBI increased the repo rate. There was, however, no reset period in the base rate era.

However, in the MCLR based lending, the interest rate of the home loan (and therefore the EMI’s) gets re-priced on a periodical basis. As per the RBI rules, “the periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract.” Predicting the interest rate movement will be highly speculating in nature.

Refinancing a MCLR linked loan
In case, after few years of servicing the loan, one finds the interest rate or the markup too high or would like to switch to another reset period, refinancing the loan with another lender is an option. Mehra says, “Yes, you can switch the MCLR linked home loan to another bank at any time. The good thing is that you can do that without paying any foreclosure charges to the existing lender as it is a floating rate loan. However, you may have to pay a processing fee at 0.5%-1% on the transferred amount. A stamp duty at 0.20%-0.50% can also be charged by the lender.

The possibility of refinancing could, however, be remote. “With respect to changes in MCLR and reset period, on a case by case to basis, lenders might be willing to adjust your interest rates provided you have a healthy credit history. Higher the loan outstanding and better the credit history, the existing lender is likely to be flexible, and lower overall interest rates in order to retain the loan, rather than lose it to competition,” says Punja.

Conclusion
As far as choosing between 6 and 12 months reset period is concerned, look for flexibility and options while selecting and negotiating with the lender. “The offering of home loan on 6-month MCLR is a new phenomenon. So, you need to wait till you understand the pattern of rate offering under 6-month MCLR,” says Mehra.

Whatever reset period one chooses, it’s important to have a systematic partial prepayment plan in place to lower interest burden on the home loan. After all, the early you finish the home loan, higher will be one’s own equity in the house.

MUMBAI: Country’s largest bank, State Bank of India has reduced home loan rates between 10 to 25 basis points, a move that will force other lenders to reduce rates. SBI has refrained from cutting its marginal cost of lending rate (MCLR) which stands at 8% for one year. SBI has the largest share on the home loan market.

The bank will now charge salaried borrowers 8.35% on home loans upto Rs 30 lakhs as against 8.60% For loan above Rs 30 lakhs bank will charge 8.50%, down by 10 bps. The bank will continue to charge 8.60% on loans above Rs 75 lakhs. The rate cut will help only the new borrowers since the existing borrowers are locked into one year fixed rate on interest as per the rule of arriving at lending rates.

The reduction in rates comes within a month of five associate banks merging with the parent bank. Recently SBI cut deposit rates sharply by 50 basis points across different maturities.

SBI has also said that an eligible home loan customer can also avail of an interest subsidy of Rs. 2.67 lacs under the Pradhan Mantri Awas Yojana scheme. SBI said that to supplement the affordable housing push, SBI has also come out with special offerings for construction finance to the builders for affordable housing projects. “This will give a dual push both for construction finance and also for home finance for affordable homes.”

Mr Rajnish Kumar, managing director, SBI said, “We have seen a steep hike in the home loan enquiries recently and reduction in rates will further help millions of home buyers fulfill their dream of owning a home. Individuals can apply for home Loans through multiple channels.”

Interest rates on home loans have come down. But how easy, or difficult, is it to take advantage of these cuts? We spoke to some people who tried to reduce their EMIs
Ashwini Kumar Sharma, Vivina Vishwanathan | Last Modified: Tue, Mar 28 2017. 09 38 AM IST | Livemint.com

Early this year, banks and housing finance companies reduced interest rates on home loans. The falling rates encouraged Dr Amrendra Kumar, 34, hair transplant specialist and director of DermaClinix, a Delhi-based skin and hair care clinic, to approach his lender HDFC Ltd to revise the interest on his outstanding home loan of Rs80 lakh. His colleagues Dr Kavish Chouhan (who had a Rs60 lakh loan from HDFC) and Dr Jyoti Gupta (who had a Rs.30 lakh loan from Deutsche Bank) too approached their lenders. They were paying interest rates in the range of 9.45% and 9.55%.

As the loan amount was high, lower interest rates would mean a lot of savings for all of them.

They approached their lenders to revise the rates but did not get a positive response and decided to approach other lenders. They took help from a direct selling agent (a loan distributor), who offered to transfer their loans to Axis Bank Ltd, where they would have to pay 8.5% per annum. All of them decided to transfer the loans. While they were arranging the documents, the agent told them that Axis Bank can offer 8.35%, which could even go down to 8.15%, but they would have to get the documents quickly for that.

When Gupta approached Deutsche Bank, it gave her the required loan and foreclosure documents in a few days. But when Kumar and Chouhan went to HDFC, they were told to wait for up to 15 days. Due to delay in getting the documents, they could not avail the special offer but they wanted to transfer their loans to Axis Bank, as it was offering 8.5%, without any processing fee.

Deutsche Bank did not make any counter-offer but HDFC did. It first offered to reduce the rate to 8.95%, with a one-time fee of Rs5,750; and than to 8.7%. But, when the doctors insisted on moving, it agreed to match the Axis Bank rate, with a fee of Rs575. An Axis Bank spokesperson said: “Customers are offered lower home loan interest rates on the basis of their credit profile. Credit score and credit history are important parameters in the credit appraisal process.”

Based on the their experience, it seems that there is stiff competition among lenders. Therefore, borrowers should negotiate well before deciding to transfer home loans.

Things to know

Offerings: Led by State Bank of India (SBI), which cut up to 90 basis point from its lending rates, other banks too cut their rates. Housing finance companies too reduced their lending rates. For instance, HDFC Ltd reduced its home loan rates from 9.10-9.15% to 8.65-8.75%. One basis point is one-hundredth of a percentage point.

Charges: Shop around and know the charges and fees that you may have to pay for transferring a loan. According to an HDFC spokesperson, there is no selective process for doing so and old customers can move to new rates by paying a small conversion fee.

Beside lenders’ websites, agents and loan aggregator websites can also be used to compare interest rates and charges. Typically, stamp and administration charges are in the range of Rs1,000 and Rs1,500. As mentioned above, many lenders offer “nil” processing charges too. Make sure to ask if the lender wants you to buy property insurance.

Documents: You will need to have the documents in place. “The documentation required for balance transfer and purchase of a new home include proof of identity, proof of residence, latest 3 months salary slip (for salaried customers), tax returns for the last 2 years (for self-employed customers) and last 6 months’ bank statements. Home loan sanction turnaround time is 3-5 working days,” said the Axis Bank spokesperson.

“The same set of documents are required that would be needed for any new home loan. As the customer is moving from another bank to HDFC, we would need a list of documents in possession of the customer’s existing bank. We would also need the outstanding loan amount from the customer’s bank,” said an HDFC spokesperson.

Remember to arrange your Know Your Customer (KYC) documents such as identity and address proofs. Proofs of income can include Form 16, income tax return and salary slips along with bank statements, and the complete chain of property titles along with registration deed.

Duration: “If the customer has taken a loan for a project that we have already approved, then the processing time will be much faster. The duration for disbursement also depends on the documents customer provides,” said M.G. Vaijinath, chief general manager-real estate and housing department, State Bank of India. Also, it depends on the bank you are dealing with.

While transferring a home loan to lender who charges a lower interest is financially beneficial, the process is not easy. “We had to make several requests via emails and on phone, and about 4-5 visits to HDFC. At last, we had to settle with HDFC, forgoing the 0.10% lower interest that Axis Bank was offering, as it was taking too much time,” said Chouhan. A loan transfer usually takes 2 weeks, but in some cases it can take more than that, as was the case above.

Ideally you should first approach your existing lender, and check if it is ready to reduce the interest rate. Also enquire about the charges. Ask for some fees to be waived. Simultaneously, approach other lenders and use your credit score to bargain. Compare offers of your existing lender with new lenders’ carefully. Do your math and only if the long-term benefits are substantial, decide to transfer your home loan.

New Delhi – Ahead of the RBI monetary policy this week, the country’s largest bank SBI has reduced benchmark lending rate by 0.15 percent to 9.10 percent, a move that will lower EMIs for borrowers.

Base rate or the minimum lending rate of the bank has been reduced from 9.25 percent to 9.10 percent effective April 1. The bank has also reduced its base rate by 0.05 percent to 9.25 percent.

Similarly, benchmark prime lending rate (BPLR) has also been reduced by similar percentage points to 13.85 percent from 14 percent.

With the reduction, EMIs for the new as well as existing borrowers who have taken housing and car loans at base rate will come down by at least 0.15 percent.

The new rate is effective from the date the bank merged five of its associates and Bharatiya Mahila Bank putting it on the list of top 50 large banks of the world.

The total customer base of the bank has reached 37 crore with a branch network of around 24,000 and nearly 59,000 ATMs across the country.

The merged entity has a deposit base of more than Rs 26 lakh crore and advances of Rs 18.50 lakh crore. It is to be noted that the SBI has made changes in signage and logo, with its iconic keyhole set against the background of inky blue.

There have been minor changes in the design and colour of SBI’s new look from April 1.

The background to the SBI signboard has been changed from white to inky blue while the SBI logo or the monogram is a few shades lighter than the existing blue.